In a bid to tackle non performing asset (NPA) situation plaguing the banking system, the Reserve Bank of India has tightened norms for the sale of bad loans to asset reconstruction companies (ARCs).
The central bank has said that ARCs will now have to invest and hold minimum 15 percent security receipts as against 5 percent held earlier. Also, the planning time for NPA realisation has been cut to 6 months from 12 months currently.
Sharing views on revised norms, P Rudran, MD & CEO, Asset Reconstruction Company of India (ARCIL) said this move will result in better discipline from banks and ARCs. Initially, he expects to see reduction in loans bought by ARCs.
He further added that according to the new rules, the management fees will be calculated based on the value of the NAV.
Meanwhile, VR Iyer, CMD, Bank of India said that the public sector lender has sold about Rs 4,500 crore of loans to ARCs in the past one year. BoI doesn't expect any sale in this quarter, but may optr for selling Rs 400-500 crore worth of bad loans to ARCs post Q3, she added.
Below is the verbatim transcript of their interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy
Latha: What is your sense if ARCs have to pay 15 percent do you think there will be fewer assets that will be sold?
Iyer: It is a very good guideline, ARCs will now have to invest 15 percent cash payment in fact, that will be good. The second most important thing which they have also brought is that the commission payable which will not be on the initial value which we have arrived at, at the time of sale, it should be at the time of valuation than every six months. So this will result in ARCs also finding out resolution mechanism for it and that would infact expedite the resolution process for the assets which they have taken care. So this is also a very good step indeed.
Sonia: Do you think that the sale of Non-performing loans (NPLs) would come down sharply compared to the run rate we have seen in the past many quarters purely because of these new norms?
Rudran: I wouldn't say sharply, it may come down at the initial stages because this is a 10 percent increase on the subscription by the ARCs. We have to see their resources. I am not sure whether the comfortable resources of many ARCs because some of them are very small ARCs where only Rs 100 crore capital is there, they may have difficulty in the initial stages. But if they want to continue their business perhaps they have to mobilize more resources to meet the situation. So there has to be some sort of better discipline both from the banks side and the ARCs side, will have to be exercised and these regulations seems to be after 11 years of ARCs existence. This has been brought and I am sure this will be good for the industry.
Latha: Can you explain how your management fees will be now calculated?
Rudran: Management fees will now be calculated on the basis of the Net Asset Value (NAV). Earlier we had a planning period of 12 months which has now been reduced to six months that means immediately after six months we have to get the Security Receipts (SRs) to be rated by a credit rating agency. This will be a recovery rating. Based on the rating the net asset value will have to be found out because already the rating is within a range say 75 percent to 100 percent.
Latha: But even now you go to a rating agency so that doesn't change.
Rudran: That doesn't change, only thing is that now we are recovering the management fee based on the outstanding SRs. Outstanding SR and the NAV of the SR may not be the same, in very few cases you will find that 100 percent value even after rating is there. So if the rating comes down, we have to make a mark to mark provision in our books. In addition to that the management fee will also have to be calculated only on the basis of the NAV.
Bank of India stock price
On August 07, 2014, at 14:05 hrs Bank Of India was quoting at Rs 278.20, up Rs 4.35, or 1.59 percent. The 52-week high of the share was Rs 356.75 and the 52-week low was Rs 126.95.
The company's trailing 12-month (TTM) EPS was at Rs 39.98 per share as per the quarter ended March 2014. The stock's price-to-earnings (P/E) ratio was 6.96. The latest book value of the company is Rs 465.37 per share. At current value, the price-to-book value of the company is 0.60.
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